Saturday, October 4, 2008

Lehman bear on the ropes

Remember David Einhorn of Greenlight Capital LLC? Who shorted Lehman brothers to zero? Now he is having trouble.

Oct. 3 (Bloomberg) -- Maverick Capital Ltd., Greenlight Capital LLC and The Children's Investment Fund Management LLP fell more than 12 percent in September as stock hedge funds posted record monthly losses and braced for client defections.

Lee Ainslie's Maverick Capital declined 19.5 percent and Greenlight Capital, run by David Einhorn, was down 12.8 percent, according to investors in the New York-based funds. Children's Investment, overseen by Chris Hohn in London, fell 15 percent, based on a preliminary estimate.

Stock hedge funds fell an average of 8.6 percent in September, the biggest one-month loss since Hedge Fund Research Inc. began collecting data in 1990. While that was better than the 12 percent decline by the MSCI World Index, a benchmark for global stocks, industry analysts expect investors to increase their requests to pull money from funds.

In today's WSJ, we learned that Lehman is now accusing JPMorgan of holding back $17 billion of funds, so as to hasten it's demise:

The creditors' group alleges that J.P. Morgan Chase & Co., which acted as a financial middleman between Lehman and other lenders, helped spark a "liquidity crisis" at Lehman before the firm filed for Chapter 11 bankruptcy proceedings earlier this month, according to a filing in federal bankruptcy court in New York.

According to the court filing, about $17 billion in Lehman cash and securities were being held at J.P. Morgan as collateral. In serving as a middleman, or so-called clearing bank, J.P. Morgan operates the bank plumbing that connects firms such as Lehman to third-party lenders. In that role, J.P. Morgan held collateral to ensure the lenders' loans to Lehman can be repaid. In its claim, the creditors group alleges that J.P. Morgan "withheld $17 billion in excess assets" from Lehman Brothers "in the days just prior to the bankruptcy filing."

In the claim, the creditors say that J.P. Morgan's refusal to make the assets available to Lehman may then have contributed to Lehman's cash strain.

I guess it wasn't the $42 billion of securities that Lehman had that were marked down by $25 billion?

But look at Goldman Sachs. They publish a daily list of stocks owned by hedge funds on the ropes! The hedge funds are preying on their young!

Hedge funds are responding to tough times in the markets by embracing cannibalistic trading strategies that seek to profit from the travails of their competitors, industry executives say.

These "liquidiation-unwind" trades involve hedge funds selling short shares that are widely held by their rivals. Goldman Sachs publishes a list of 50 "very important" hedge fund positions that can serve as a guide for investors pursuing such tactics.

The strategies are designed to make money when hedge funds are forced to sell holdings in response to redemptions by their investors. Because so many funds hold similar positions, forced selling by one can destabilise the strategies of others.

In its Wednesday update on concentrated hedge fund positions, Goldman said: "Forced selling to cover redemptions and deleveraging . . . has put downward pressure" on such shares. As a result, a favourite hedge fund strategy during the bull market - mimicking the positions of others - has been turned on its head. "Buying the most concentrated stocks . . . has been a poor strategy during the current bear market," Goldman said.

The announcement last month that Ospraie Management was winding down its flagship fund has encouraged predatory activity. One Hong Kong-based manager sent a note urging friends to short energy and mining shares favoured by Ospraie.

Some managers say they have been monitoring the positions held by Ospraie so they will be ready if other funds with the same positions liquidate their holdings.

"I certainly wouldn't want to be long any of these companies," said one. "I want to lock up six-month borrowing on these shares and short them."

Ospraie founder Dwight Anderson told investors in early September that 60 per cent of losses in July and August stemmed from equities, mainly in energy and mining. Its largest position was in Xto Energy, one the 20 most widely held stocks by hedge funds, according to Goldman.
Firms are monitoring Deutsche Bourse because of a big position in its shares held by Atticus, which has seen its main hedge fund lose 25 per cent this year.

Greenlight Capital, the hedge fund run by David Einhorn, told investors on Wednesday that it was down 17 per cent so far this year, in part because "investors have been unwinding trades that they otherwise believe make sense". Greenlight said it would "try to be opportunistic" in response.

Is it any wonder why no one on Wall Street trusts one another. And when banks lend to each other isn't that reflected in the LIBOR rate? LIBOR=trust, and a high LIBOR rate means there is no trust in the system.

Or how about commercial paper? It fell by $94.9 billion last week; and by $208 billion the last three weeks.

How can there be trust in the commercial paper market, if the banks won't even lend to each other? And in the financial area, there isn't.

The FDIC insurance of $250,000 is just a step in the right direction. If we don't want to have Ireland, we should temporarily insure all deposits. We need coordinated interest rate cuts across the globe. And let the Fed step in the commercial paper market.

Otherwise we'll have more margin calls and increased liquidations of assets at continual fire sale prices and we'll get both a systemic freeze up and meltdown of the financial system.


Andrew Abraham said...

Actually this was the worst month on record..... add the restriction on short selling impeding their trading...... is it a time to invest with them or sell? We the investors at would like to hear your opinions


palmoni said...

Invest with them...Value investors look for securities that are cheap-Einhorn looks for securities that are misvalued in the marketplace, and sometimes that approach takes time for it to develop fully. And in this market, some people don't even have tomorrow.

They have proven themselves over time. But I could have a bias toward him. He's from Milwaukee!

And Thursday, the short restrictions come off. You won't have that variable in the equation!

Andrew Abraham said...

Members of have posed this question... would you have invested with Ben Graham...It took him almost a decade to get to break even? It is a hard question..what do you think... I am sure our members of myinvestorsplace would like to know... maybe you post your blog and join us... thanks